Why India’s Role in the Global Economy is Still Work in Progress

By Frank-Jürgen Richter

Forbes India, September 19, 2011

While there may be significant worries around its state of governance, India clearly has a lot to gain from the economic woes of the developed world

We live in unprecedented times. The mood in Europe and North America is deeply sombre, as business leaders, economists and policymakers alike expect the economic climate to get worse before it gets better. The divide between developing countries like India – with large trade surpluses and low debt – and developed countries with large trade deficits and high debt remains a major theme.

In Naples, Italy, Horasis held the 2011 Global India Business Meeting last month. Since 2009, the annual Global India Business Meeting which gathers the CEOs of leading Indian and global firms to set the agenda for India and the world. We questioned not only the world’s financial fragility, including the possibility of US and Greek default, but also how the Japanese tsunami and associated nuclear disaster might affect the global trade matters, and how the changes in the Arab world might impact the Indian economy. Other questions were floated – will the dramatic cuts in public sector spending in much of the developed world derail global recovery? Could the disruption of financial flows unsettle emerging markets, including in India? Will perturbations in global growth adversely impact Indias growth perspectives? And importantly, what are the challenges and opportunities facing Indian corporations and investors? 

India’s strong growth figures across several measures clearly instilled robust optimism among the audience. ‘Most of us entrepreneurs are optimistic about the country’s economy for 2011 and 2012,’ said Malvinder M Singh, chairman, Fortis Healthcare, India. Rahul Bajaj, chairman, Bajaj Auto, India, commented that ‘India’s trade with the EU could face severe problems due to the ongoing crisis facing Greece and other debt-ridden EU economies. He added that despite well-founded optimism, there are several challenges to be met in the short and medium term, including governance issues such as the ones which surfaced during the Commonwealth Games in 2010. According to Rajan Bharti Mittal, vice chairman & managing director, Bharti Enterprises, India, there are issues all around doing business in India. Governance challenges remain, and poor infrastructures still remains an issue. Still, we in India are talking more about our problems–and the world is seeing India as a great place to come and invest. That’s what we need to celebrate. He summoned participants to have full faith in the India story. 

The opening plenary panel focused on identifying the key factors that will shape India’s economy over the next 6 to 12 months trying to provide participants with new perspectives and genuine take-home value. Of course, we all knew of the legendry GDP figures, presently [only] 8.9% and wondered how the rising inflation and increasing current account deficit will affect the future rate, after the significant bounce back after the 2008 crisis. Most of us recall that the World Food Price Index tends to rise rapidly in most years as the year end approaches, except perhaps in 2008, when the financial markets caused a rapid down-turn. But now, in 2011, the Index remains stubbornly high at new record levels. I think this does not bode well for many regions, not only in India where the national and state governments struggle to support the poorest people, notwithstanding the RBI’s policy tightening in recent months. Of course, oil price rises contribute to rising inflation with a knock-on effect across all sectors but some of the delegates expressed their belief of the future with a long-term growth of 10% or so.

There was another focus at the meeting on ‘how global investors should look at India, and how Indian investors should look at global markets, along with sector-specific discussions’. It is time for India, and emerging countries in general, to create freer and more enabling environments for foreign direct investment (FDI). Of course, foreign direct investment in India has increased in recent years, and there is a lot more potential for investment in India. But I sensed a reluctance to engage as several delegates expressed their fear that the investment climate in India was still too onerous and unattractive for many overseas investors, too much red-tape varying town by town, too much corruption, too much talk, and not enough action; and perhaps a bit of ‘we don’t wish to be taken over by outsiders with their quick ways of doing things that is not the Indian style’. These may seem grim words, but there was a sense of all this. Yet there was also a sense of great optimism as India, by and large, is a nation of go-getters, of entrepreneurs who wish to become better all the time.

They will learn to overcome obstacles and aid the willing investor. Many felt that there was some conflict between the need for less involvement of the so-called Big Government and the continuing need for strong India-wide reforms, led by the Government that would create level a playing field for investors in all States. One prime example was the IT sector that had boomed in certain regions delegates thought that some IT ought to be turned to the advantage of India Inc lending leverage to the agriculture and manufacturing sectors: this again reflects the conflict between Big/Small government as new enabling regulation needs to be applied vigorously, but at the same time all would hope that officials would stand back and not meddle as they had in the past.

One major difficulty lay with rural India. It has huge potential, and agriculture is booming, but there is still a steady migration of India’s rural population of over 800m to the cities, making the need to invest in transport, housing and sanitation, etc., very pressing. Again, we see the conflict between big/small government. Government has to drive new infrastructure projects with vigour and that will anger people who are dispossessed of their homes and livelihood as roads, railways, water systems and new firms are deployed on their lands. Yet space has to be given to the entrepreneur who could educate and employ the people in new wealth-creating ventures.

In my own global travels across all continents I meet and talk with Heads of States, ministers, as well as quite ordinary people. All of them mention with varying degrees of emphasis three concepts: that India as a nation is indeed becoming better (on various measures); that the global financial situation will affect us all; and that it is important for the US to provide strong guidance as it is still the world’s biggest economy. I find across all nations, developed as well as developing, that the gap between the poor and the rich is lessening slightly, but it is a slow process hidden by many local issues concerning governance, health and education issues. What I see is a shift from west to the east. India can only benefit from what’s happening in the developed world. Indian companies can acquire European and American assets and combine them with their existing operations. Thus India’s role in the global economy is still a work-in-progress, but it looks very promising.

Parts of India have enviable GDP measures, their outlook is bright and reflects in the overall hope for the future. This is especially true in term of its demographic profile: there are many younger, reasonably well educated young people. Contrast that with China, where their one-time unlimited work-force may have about one generation left before they suffer a rapid decline in working population. Indian hopes thus run high and they know that they must streamline their democratic institutions, create far better systems of governance both for the benefit of their workers, and their people in general, but also to allow closer-knit trade with global partners, who will learn to trust the managers of the new Indian firms.

The author is Chairman and Founder, Horasis, Switzerland. Horasis hosts the Annual Global India Business Meeting